The perfect time to sell your home is...
When to sell your home?
Last week, I focused on the importance of location and leverage in improving the capital appreciation of real estate.
In today's column, I will share my thoughts on when to lock in capital gains.
It is difficult to time the property market and plenty of people have been hurt trying to do so. Greed and fear dupe us into making poorly timed transactions.
Smart investors and home owners don't believe they can identify the perfect time to sell. Instead, they sell when their objectives are met.
They know that if they let emotions trigger the sale, they will get burned more often than not.
The best time to set your objective for selling is actually as soon as you buy the property.
You should have at least a vague idea of how long you plan to hold it.
Of course, you can adjust your objectives to accommodate changes in your personal and financial situations, but you should never allow short-term market movements to influence your selling decision.
Your objectives are likely to fall into two buckets: lifestyle and financial.
SELL WHEN LIFESTYLE CHANGES
When you set a lifestyle objective, you are aligning home ownership with the various milestones in your life.
This includes marriage, children, upgrading, downsizing and retirement.
The trigger for selling your home is when that milestone approaches.
If you plan properly, you can generally give yourself plus or minus a year so that you can sell in an environment that is more favourable to you.
It is important to note that you are not timing the market. You are just giving yourself enough flexibility to wait out a temporary and predictable downturn, like a period of cooling measures.
Also, you are not troubled about whether you are selling at the peak because you bought the property at a fair market price, held it for a number of years and sold it at a good appreciation.
You don't worry about whether you could have sold it for more at a later date.
The important thing is that you achieved your lifestyle objective.
SELL WHEN TARGETS ARE MET
The other type of objective, which is more typical of investors, is the financial one.
Here, the investor sets a quantitative goal at which he will sell when he reaches it.
For example, you might establish a goal that includes a five-year rental yield of 6 per cent plus an annualised capital appreciation of 20 per cent.
You would not have arbitrarily plucked this out of the air.
You would have arrived at this after careful analysis.
If you are a disciplined investor, you will sell when you achieve your financial objectives, even if the market is hot and your greed is encouraging you to hold on to the property for longer.
Assuming you have achieved your lifestyle or financial objectives, when you sell, you will be faced with re-investment risk, especially when the market is overheated.
Re-investment risk refers to the possibility that you will not be able to find a new investment that will give you the same type of returns as you just received.
This places a burden on you as a new buyer to apply the same type of discipline you showed when you purchased your previous investment.
As discussed in earlier columns, this means you must do your homework to identify homes that give you the greatest potential for future, fundamental appreciation. This work must be done before or while you are in the process of selling your current investment.
Although you cannot time the market, you can time the sale of your home to when you meet your lifestyle or financial objectives and while you are setting yourself up to succeed in your next investment. This is called reducing your investment risk.
Sam Baker is co-founder of SRX, an information exchange formed by leading real estate agencies in Singapore to disseminate market pricing information and facilitate property transactions. For more details on market trends and figures, visit the resource pages of www.srx.com.sg